WPS4788
Policy ReseaRch WoRking PaPeR 4788
Drivers and Obstacles to Banking SMEs
The Role of Competition and the
Institutional Framework
Augusto de la Torre
María Soledad Martínez Pería
Sergio L. Schmukler
The World Bank
Development Economics Research Group
&
Office of the Chief Economist
Latin America and the Caribbean Region
December 2008
Policy ReseaRch WoRking PaPeR 4788
Abstract
This paper studies the factors banks perceive as drivers SMEs due to the significant competition in the corporate
and obstacles to financing small and medium enterprises and retail sectors. They perceive the SMEs market
(SMEs), focusing on the role of competition and the as highly profitable, large, and with good prospects.
institutional framework. Using a survey of banks in Moreover, banks are developing coping mechanisms to
Argentina and Chile, the paper shows that, despite overcome the particular institutional obstacles present in
alleged differences in the countries' environments each country and to compete for SMEs. Banks' interest in
regarding rules, regulations, and ease of doing business, SMEs is not based on government programs, yet policy
SMEs have become a strategic segment for most banks in action might help reduce the cost of providing financing,
both countries. In particular, banks have begun to target especially long-term lending.
This paper--a product of the Development Economics Research Group and the Office of the Chief Economist, Latin
America and the Caribbean Region--is part of a larger effort in the departments to understand financial development.
Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org.The authors may be contacted
at adelatorre@worldbank.org, mmartinezperia@worldbank.org, and sschmukler@worldbank.org.
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Produced by the Research Support Team
Drivers and Obstacles to Banking SMEs:
The Role of Competition and the Institutional Framework
Augusto de la Torre
María Soledad Martínez Pería
Sergio L. Schmukler *
Abstract
This paper studies the factors banks perceive as drivers and obstacles to financing
small and medium enterprises (SMEs), focusing on the role of competition and the
institutional framework. Using a survey of banks in Argentina and Chile, the paper
shows that, despite alleged differences in the countries' environments regarding rules,
regulations, and ease of doing business, SMEs have become a strategic segment for
most banks in both countries. In particular, banks have begun to target SMEs due to
the significant competition in the corporate and retail sectors. They perceive the
SMEs market as highly profitable, large, and with good prospects. Moreover, banks
are developing coping mechanisms to overcome the particular institutional obstacles
present in each country and to compete for SMEs. Banks' interest in SMEs is not
based on government programs, yet policy action might help reduce the cost of
providing financing, especially long-term lending.
JEL Classification Numbers: G21, G28, L25, O12, O16
Keywords: small and medium enterprises, bank finance, financial constraints,
banking market structure, institutional factors, regulation, competition
*This paper is part of a broader World Bank Group project to understand bank financing to SMEs. The
information used for this paper was collected by a team that traveled to Argentina and Chile during
December 2006 to interview banks and is described in detail in World Bank (2007a). We received very
helpful comments and suggestions from many colleagues, including Martin Cave, Stijn Claessens,
Vivek Ghosal, Rogelio Marchetti, Margaret Miller, Ary Naim, Sophie Sirtane, and Greg Udell. We also
received many useful comments at presentations held at the Asobancaria (Bogota, Colombia), CASIN-
IFC Forum on SMEs (Geneva, Switzerland), the Central Bank of Argentina (Buenos Aires, Argentina),
the Central Bank of Chile (Santiago, Chile), the CESifo Summer Institute (Venice, Italy), the Finance
Forum at the World Bank Group (Washington, DC, USA), the Latin American Congress on Banking
and SMEs (Cartagena, Colombia), and the World Bank (Washington, DC, USA). Maria Bernarda
Dall'Aglio, Noemí Soledad López, Mercedes Politi, Mira Olson, and Victoria Vanasco provided
excellent research assistance at different stages of the project. We thank all the banks that participated
in the study for their generosity in sharing information and for interacting with all the members of the
team. The views expressed in this paper are entirely those of the authors and do not necessarily
represent the opinions of the World Bank Group. Email addresses: adelatorre@worldbank.org,
mmartinezperia@worldbank.org, sschmukler@worldbank.org
1. Introduction
How small and medium enterprises (SMEs) finance their operations is a
subject of significant interest to policymakers and researchers alike. SMEs account for
a sizeable share of overall employment levels in both developed and developing
countries.1 Furthermore, since most large companies usually start as small enterprises,
the viability of SMEs becomes crucial to any economy wishing to prosper. Concerns
are compounded by evidence showing that SMEs tend to be more financially
constrained than large firms and that lack of access to finance is an important obstacle
to their growth. In particular, SMEs find it difficult to obtain external financing from
banks and capital markets given their size and characteristic opaqueness.2
As a consequence of this perceived lack of financing and given the segment's
economic importance, governments around the world have implemented a number of
programs to foster SME lending.3 They have included subsidized or favorable loans,
guarantees, and special lines of credit by certain banks (typically public banks),
usually for certain economic sectors.4 More recently, governments have participated
in programs to foster factoring and structured products that allow bank financing to
reach SMEs by including large corporations and special purpose vehicles to decrease
problems of moral hazard and asymmetric information (de la Torre, Gozzi, and
Schmukler, 2007).
Aside from government programs to finance SMEs, what other factors can
1Using data from 1990-99 for 76 countries, Ayyagari, Beck, and Demirguc-Kunt (2007) show that on
average SMEs account for 55% of employment in manufacturing. In Argentina and Chile, SMEs
account for 70% and 86% of manufacturing employment, respectively.
2For evidence that SMEs tend to be more financially constrained than large firms, see Schiffer and
Weder (2001), IADB (2004), Beck, Demirgüç-Kunt, and Maksimovic (2005), and Beck, Demirgüç-
Kunt, Laeven, and Maksimovic (2006). Furthermore, Beck, Demirgüç-Kunt, and Maksimovic (2005)
show that lack of access to external finance is a key obstacle to firm growth, especially for SMEs
3Beck, Demirgüç-Kunt, and Honohan (2008) provide a survey of policies undertaken by governments
to improve financial access by households and firms.
4See Beck, Klapper, and Mendoza (2008) for a survey on partial credit guarantee schemes around the
world.
1
help alleviate SME financing constraints? An extensive literature has shown that
access to external financing and firm growth are shaped by a country's legal
institutions (La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1997, 1998; Demirguc-
Kunt and Maksimovic, 1998; Beck, Demirguc-Kunt, and Maksimovic, 2005, and
Beck, Demirguc-Kunt, Laeven, and Maksimovic, 2006). In other words, in countries
with better institutional environments, financing obstacles are smaller and firms
obtain more external financing and are able to grow faster. More importantly, recent
research using firm-level data has shown that SMEs seem to benefit the most from
improvements in the institutional environment. Using data from 4,000 firms in 54
countries, Beck, Demirguc-Kunt, and Maksimovic (2005) show that marginal changes
in the institutional environment result in financing and legal obstacles having a
smaller negative impact on firm growth, and this effect is larger for SMEs. Using a
similar database, Beck, Demirguc-Kunt, and Maksimovic (2008) show that SMEs
gain greater access to bank finance as a result of improvements in property rights.
In this paper, rather than focusing on firms' perception regarding SME
financing (as has been the case with most of the recent studies), we analyze the factors
banks perceive as drivers and obstacles to lending to SMEs. Of particular interest is
the role of the competitive and institutional environments in shaping SME lending,
and more generally banks' interest in dealing with SMEs. By institutional factors we
mean the rules and regulations that affect the functioning of the financial system and
influence the operation of the private sector, as well as the more general
macroeconomic environment that shapes financial contracts. We compare banks'
perceptions about SMEs in Argentina and Chile.5 We use a survey that covers a wide
5The World Bank has also recently conducted studies of SME financing in Colombia (Stephanou and
Rodriguez, 2008) and Serbia (World Bank, 2007b). Using data for a sample of banks in developed and
developing countries and SMEs in Latin America, de la Torre, Martínez Pería, and Schmukler (2008)
2
range and a significant proportion of banks in these countries. This is relevant because
banks seem to be the main providers of external finance (from the financial sector) to
SMEs in both places.
The comparison between Argentina and Chile is interesting. The two countries
are neighbors, they are both growing, emerging economies, and they have
implemented many financial reforms over the last decades to foster competition and
create a market-friendly environment. As part of this, both Argentina and Chile
experienced the arrival of foreign banks during the 1990s, which now hold a
significant market share (26% in Argentina and 64% in Chile). In several cases, the
same international banks have started operations in both countries, a fact that allows
us to compare their approach to SMEs in different settings. Moreover, Chile suffered
an economic slowdown after the Asian crisis, during 1998-99, while Argentina had a
severe economic crisis during 2001-02, which involved reprogramming of bank
deposits, the conversion of dollar deposits to peso deposits, and debt default. Both
economies recovered afterwards, with their banking systems affected in very distinct
ways.
Besides the analogies between Argentina and Chile, there are also significant
differences in how the institutional environment is perceived to work in each country.
According to several widely used indicators, Chile's institutional environment is
perceived to rank better than Argentina's. For example, the Institutional Development
component of the Global Competitiveness Index produced by the World Economic
Forum, which ranks countries from best to worst institutional environment, ranks
Chile in 23rd place out of 131 countries, while it ranks Argentina in 123rd place.6 The
claim that even large and foreign banks might have incentives and a comparative advantage in serving
SMEs through alternative models to relationship lending.
6Rankings can be found at http://www.gcr.weforum.org/.
3
World Bank's Governance Indicators also rank Chile better than Argentina in terms
of regulatory quality, rule of law, and control of corruption. With higher rankings here
indicating better outcomes, Chile is in the 90th percentile in terms of regulatory
quality, rule of law, and control of corruption, while Argentina ranks in the 20th to 40th
percentile depending on the indicator considered.7 According to The Heritage
Foundation's Property Rights Index (one of the components in the Economic
Freedom Index), Chile stands at 90 while Argentina receives a 30, with higher
numbers (on a scale from 0 to 100) indicating greater protection of property rights.8
Finally, the Doing Business in Latin America 2008 report shows that Chile ranks
better than Argentina in terms of legal rights protection and regarding the time and
cost to register property (World Bank, 2007c). Given all these alleged differences in
the institutional environments in Argentina and Chile, this paper studies whether
banks view them as shaping their involvement with SMEs.
The paper's main findings regarding banks' perceived drivers and obstacles to
financing SMEs are as follows. First, despite the mentioned institutional differences,
SMEs have become a strategic sector for most banks in both countries. Furthermore,
banks perceive the SME lending market as large, unsaturated, and with good
prospects. Second, this interest in SMEs is not based on government programs. Banks
seem to be focusing on SMEs because, among other things, they argue that the
segment's profitability will more than compensate for the higher implied costs and
risks, especially given thinning margins in the corporate and retail sectors due to
competition in those segments. Third, since banks have developed coping
mechanisms to deal with potential institutional deficiencies, they do not perceive any
7See Kaufmann, Kraay, and Mastruzzi (2008) for a detailed description of these governance indicators.
For rankings, go to http://info.worldbank.org/governance/wgi/index.asp.
8 Data for the Heritage Foundation Index of Property Rights can be downloaded from
http://www.heritage.org/research/features/index/downloads.cfm.
4
obstacles significantly impeding them from serving the segment. In other words, the
potential benefits of serving SMEs have generated incentives for banks to develop
ways to overcome the institutional limitations they perceive as obstacles. Fourth, in
the case of international banks present in both countries, the strategies to engage
SMEs across countries are remarkably similar. Finally, the institutional environments
appear to be more relevant for certain types of financing, like long-term loans in fixed
rates in domestic currency. Thus, policy action might focus on complementing what
banks need to expand their participation and provide the type of financing that might
still be lacking.
The paper is organized as follows. Section 2 presents the data on Argentina
and Chile. Section 3 discusses the extent and type of SME financing. Section 4
analyzes the drivers of bank involvement with SMEs. Section 5 describes the
obstacles to SME lending. Section 6 discusses how competition and government
programs affect bank involvement with SMEs. Section 7 concludes.
2. Data
Our analysis is based on information gathered by means of on-site interviews
with banks' top management, the use of a tabulated questionnaire, and a detailed data
request designed to obtain unique information on bank lending to SMEs, which are
not available to the Central Banks of each country. The interviews and data
processing are confidential, so banks felt practically no constraint in sharing their
information, with the understanding that the data would be reported in an aggregate
way, without disclosing each bank's strategy or positions. The questionnaire was
designed to address three broad areas: (1) measuring the extent of bank involvement
with SMEs, (2) learning about the determinants of the degree of bank financing to
5
SMEs, such as demand factors, competition, corporate strategy, and macroeconomic,
regulatory, and institutional factors, and (3) understanding the business model and
risk management process that banks use when working with SMEs.
The survey covers 14 banks in Argentina: six foreign, six domestic private,
and two public, which account for 75% of the banking system's total assets.9 In Chile,
the survey covers eight banks: four foreign, three private domestic, and one public,
which represent 79% of the banking system's total assets. In each bank, we tried to
carry out separate interviews with the general manager (to understand the
determinants of the bank's involvement with SMEs), the SME business manager (to
assess the business model for dealing with SMEs), and the credit risk manager (to
comprehend how risks are controlled).
Except for Figure 1, the percentages presented in this paper are calculated
based on the sample of total banks interviewed that have SMEs among their clients
(13 Argentine banks and eight Chilean Banks). The percentages are usually calculated
for the aggregate sample of Argentina and Chile, and when considered relevant, these
percentages are presented by country or type of bank.
To classify SMEs, all the banks interviewed use average annual sales.
However, a variety of ranges is observed, indicating that there is not a unified
criterion to define the segment as a whole. In Argentina, the Central Bank and the
SME Secretary (SEPyME) have established their official definitions for small
enterprises (SEs) and medium enterprises (MEs), but most banks do not follow either
of them. The fact that banks do not adopt similar definitions for SMEs reflects the
heterogeneity of the banking system. For example, large international banks usually
serve SMEs with high average sales, while small banks tend to focus on smaller
9Total assets stands for liquid assets, public and private securities, loans, and other banks' assets.
6
SMEs.
The ranges of average annual sales used to classify SEs and MEs differ
between Argentina and Chile, reflecting the different size of their economies (Table
1). In Argentina, a company is considered to be an SE when its average annual sales
are approximately between US$300,000 and US$5,000,000. MEs are those with
annual sales between US$5,000,000 and US$30,000,000. In Chile, these ranges have
lower values: SEs have average annual sales of approximately US$90,000-
US$1,600,000 and MEs of US$1,600,000-US$2,3800,000.10 All the companies with
average annual sales below these ranges are considered to be micro enterprises and
those above belong to the corporate sector. It should be noted that in Argentina, loans
of AR$500,000 (US$ 166,667), or less can be treated as consumption loans according
to Central Bank (BCRA) regulations, even when they are granted to a company (as
long as the total debt the client has with the bank does not exceed this amount).
In the rest of the paper, we ignore the heterogeneity of ranges observed in the
definition of SMEs and use whatever definition banks use to define them. To some
degree, this makes the comparison across banks with very different definitions
difficult. Nonetheless, it is useful to analyze how banks conduct business with what
they consider to be SEs and MEs. Moreover, it would be very difficult to construct
another working definition.
3. Extent and Type of SME Lending
Bank involvement with SMEs in Argentina and Chile appears to be
significant. All banks interviewed have SMEs among their clients, with the exception
of one Argentine bank, which is planning to enter the middle-market segment (Figure
10 These ranges were calculated as the average minimum and the average maximum values of the
criteria banks use to define SEs and MEs.
7
1). The importance of the SME segment has increased to the point that more than 80%
of the banks interviewed have created a separate unit to serve it.11 In both countries
there appears to be an integral relation with SMEs. Moreover, bank exposure to SMEs
appears not to be limited to specific economic sectors or geographic regions.12
Banks have a significant level of exposure to the SME segment in terms of
loans, and this exposure is higher in Argentina than in Chile (Figure 2). The exposure
to SMEs is measured as the ratio of SME loans to total outstanding private sector
loans (including retail). In 2006, SMEs represented 37% of total bank loans to the
private sector in Argentina and 13% in Chile.13 These ratios are very similar for 2005.
The level of exposure of the most involved and medium involved banks is
unexpectedly high, representing on average 62% and 28% of the banks' loan
portfolios respectively (Figure 3.A).14 On average, private domestic banks are the
most exposed to the segment in both countries, with a level of exposure of 56% in
Argentina and 16% in Chile. In Argentina, private domestic banks are followed by
public banks (31%) and foreign banks (27%), while in Chile they are followed by
foreign banks (12%) (Figure 3.B).15,16
The type of bank lending offered to SMEs is mainly short term.17 The most
important lending products are short-term loans and overdrafts both in Argentina and
11In Argentina 77% and in Chile 87% of banks interviewed have separate SME, or SE and ME units.
12 See de la Torre, Martínez Pería, Politi, Schmukler, and Vanasco (2008) for an analysis of the
business model and risk management practices banks use to serve SMEs.
13The banks that provided this information and that are considered in this average account for 64% of
total private sector loans in Argentina and 80% of private sector loans in Chile.
14These are simple averages of the ratio of SME loans to private sector loans for the banks that belong
to each category: most involved and medium involved banks. The most involved banks are the top third
of banks with the highest share of SME loans as percentage of total loans. The least involved banks are
the bottom third of banks with the lowest share of SME loans as percentage of total loans. The medium
involved banks are the ones that do not fall in either category.
15These ratios are calculated as the sum of SME loans over the sum of private sector loans considering
the banks belonging to each category of bank type (public, private domestic and foreign).
16Despite the increasing importance of SMEs, most banks are not yet able to measure their exposure to
the segment in terms of income, costs, or risk.
17For 111 institutions of Latin America and the Caribbean, a survey conducted by FELABAN (2007)
shows that 52% of the banks offer short-term commercial loans for working capital investments, 14%
of these banks include long-terms loans, and 18% do not have an active credit policy.
8
Chile; these are geared toward financing working capital. These products are followed
by leasing and investment loans (Figure 4). Pre-trade financing is also considered
important in both countries. Document and check discounting is the second leading
product in Argentina but is not mentioned at all by Chilean banks, while factoring is a
very important product in Chile but is not considered significant by Argentine banks.
However, these products are similar since they enable companies to receive payments
in advance at a certain discount. The main difference between check discounting and
factoring lies in the instrument that is being discounted: in Argentina it is relatively
easy for the bearer of a check to claim the corresponding payment since the check is
an "executive title," while the bearer of a company receipt is unable to do so because
company receipts are typically not executive titles.18 In Chile "the use of factoring has
been facilitated after a recent legal reform that made the factura an executive title."19
Based on the data received from banks in Argentina, working capital loans
represent approximately 60% of the SME loans, while investment loans account for
almost 20% of the SME loans. In Chile, the distribution appears to be different since
short-term and long-term products represent a similar proportion of total financing to
SMEs; working capital and investment loans each represent around 40% of the SME
portfolio. As for the term of investment loans, in Argentina the average term is 1,000
days while in Chile it is 3,700 days (Figure 5). These stylized facts suggest that the
SME lending market is more developed in Chile than in Argentina.
Banks usually require some basic collateral to make loans. Approximately
70% of the loans require collateral, and the collateral requirement represents, on
18 An instrument is an "executive title" if it is established by law that the payment obligation it
represents must be met. This category cannot be established by the parties involved in a transaction, but
rather it can only be designated by law since it reflects a public interest that the obligations in certain
types of instruments are fulfilled. Therefore, the holder of an "executive title" can forcefully demand
the compliance of its payment. In Argentina some receipts can become executive titles if they are
certified, which are then called "facturas conformadas," but this is not usually done in practice.
19Quoted from bank interviews in Chile.
9
average, 96% of the loan amount. Some banks mention that their collateral
requirements are more flexible the larger the size of the company and others stress
that the requirements are stricter for long-term loans. In general, banks prefer
collateral that is easier to execute in case of default, however banks mostly maintain
these strong collateral requirements as an incentive for debtors to repay as agreed.
4. Drivers of Bank Involvement with SMEs
To understand what lies behind the trends described above, banks were asked
to indicate the drivers of SME lending and to explain how significant these factors are
in defining their level of involvement with the segment. Four main drivers were
highlighted by banks in both countries (Figure 6). First, banks are motivated to attract
SMEs as clients by the high level of perceived profitability of the segment. A large
majority of the banks consider that they will attain elevated profits that will more than
compensate for the higher costs and risks of the segment. The high profitability of
working with SMEs not only derives from lending products, but also from the
potential for cross-selling other products. Once the relation with the company is
established, banks offer clients a variety of services and obtain an extremely
significant proportion of their revenues from the fees they charge for these services.
The potential for cross-sale that SMEs entail does not necessarily imply higher risk
because no lending needs to be involved. Furthermore, many banks perceive the SME
segment to be more profitable than corporate banking. This might be explained by the
fact that spreads on corporate lending are near zero (due to high competition in both
countries), so banks are looking for new markets to diversify their income sources.
Moreover, in Argentina, the perceived risk of the corporate segment has increased
because SMEs performed better than large companies during the 2001-2002 crisis.
10
The Argentine crisis was particularly harmful for large corporations, especially
utilities companies, although the recession the country experienced affected all the
sectors of the economy. In that event, SMEs did not default by as much as large
corporations, they made efforts to comply with their debt payments, and they
recovered more quickly from the crisis.
Second, almost 70% of the banks in Argentina and 25% of the banks in Chile
mentioned the possibility to seek SMEs through relations with existing large clients as
another significant driver of their involvement with the segment. Banks systematically
ask large clients for references on their best clients and suppliers, which in many
cases are SMEs. With a list of potential clients, banks contact these companies and try
to convert them into clients by offering services or lending products, depending on the
banks' strategy. The benefit banks reap from this is not only that banks obtain an
assessment of the quality of these SMEs from large clients, but also that these SMEs
are supported by operating with these large corporations, who in some cases also
provide guarantees. Thus, banks gain very useful information and reduce the risk of
seeking new clients. In this way, banks exploit the synergies of working with different
types of clients.20
Third, more than 40% of the banks (exclusively private ones) consider the
SME segment to be a strategic sector. This is the third most mentioned driver in
Argentina (54% of banks), while in Chile it is the fourth (25% of banks). The
increased interest in the segment can be understood as a result of the change in
20 However, the way to approach to new SMEs does not seem to be fully standardized. Using
information from existing firm databases, such as credit bureaus, relying on existing deposit clients,
and attracting clients with bank credit are also other approaches that banks use to identify prospective
SMEs. With a lower degree of importance, another practice observed is the incorporation of
relationship managers from other banks, who bring their own client's portfolio. A very small
percentage of the banks also reveal that they target SMEs that are located close to their branches. The
wide variety of methods that banks use to detect potential SME clients suggests the pro-active attitude
of banks in reaching out to SMEs despite the strong demand.
11
industrial organization that Argentina and Chile have witnessed in the past few years.
In the early 1990s, companies tended to be vertically integrated, so by serving a large
company banks were able to service the entire chain of business. However, in the past
five years many large companies appear to have outsourced processes to the SME
segment, tending toward a modular integration, in which SMEs carry out these
outsourced processes. Therefore, if banks want to service the entire chain of business
they may need to lend to the SMEs that are responsible for the outsourced processes.
Banks seem to have a new role as financial entities: to finance and provide services to
the SMEs that carry out the outsourced processes and that tend to be supported by
large corporations.
Fourth, another key driver, mentioned by more than a third of the banks as a
reason for their interest in SMEs, is intense competition and exposure to the retail
and/or corporate sectors. In Chile, the excessive exposure to other segments appears
to be extremely relevant, since 75% of the banks consider it a key driver. The
decreasing profitability noted in other segments, which is due to high competition, has
induced banks to focus on SMEs. As mentioned above, competition is high in the
corporate segment. A similar phenomenon is also observed in the consumer and micro
segments, particularly in Chile. In Argentina, the consumer segment does not show
decreasing profits; nonetheless, bank participation has grown in that segment at a
rapid pace since the early 2000s, so it may be near saturation. This could explain why
the future growth of Argentine and Chilean banks appears to rely strongly on the SME
segment.
12
5. Obstacles to SME Lending
While bank involvement with SMEs is driven by the factors mentioned above,
it is also useful to assess the degree to which this involvement is affected by certain
obstacles. Surprisingly, many of the obstacles often perceived as deterrents of
engagement with SMEs are not considered significant by most banks. There are also
some differences in perceptions across countries. Below we discuss the five most
important factors perceived as obstacles by banks in Argentina and Chile.21 See
Figure 7, Table 2, and Appendix Figures 1, 2, and 3 (for more detailed information).
First, SME-specific factors are the only obstacle considered significant by
both Argentine and Chilean banks (roughly 50% of the banks in each country). These
are factors related solely to SMEs (i.e., intrinsic to their nature and behavior) and not
to other firms that operate within the same regulatory and contractual environment.
For example, informality and low quality balance sheets in Argentina, lack of quality
information in Chile, and lack of adequate guarantees in both countries stand out as
SME-specific factors that banks perceive as obstacles in serving these firms.22 Note
that lack of quality information is not mentioned at all by Argentine banks, but it is
likely implicit in the response related to informality. In Chile, when explaining the
lack of quality information, banks mention that small enterprises have limited and
non-standardized information and that financial statements are prepared only once a
year (mainly for tax reporting purposes); besides, the cost to improve the information
on SMEs are high and must be absorbed by the bank. Other factors stated are
problems related to evaluating SME risk, the weakness of family management, the
21The obstacles are ranked based on the importance they have in the aggregated sample of Argentina
and Chile.
22To increase the level and quality of information available to banks on firms (large corporates and
SMEs), the Central Bank of Argentina is working toward the establishment of a "central de balances."
This database will contain economic and financial information about the business activity of firms.
13
lack of SME associations for cooperation, and the fact that SMEs auto-exclude
themselves from the banking system.
Second, competition in the SME segment is considered a significant obstacle
by 70% of the Argentine banks while in Chile it is not regarded as significant (only
13% of the banks mention it as an obstacle). This of course is based on the banks'
perspective; while high competition is perceived as an obstacle by banks, it benefits
SMEs. Narrow margins and the distortions generated by public banks are considered
to be important issues related to the high competition in the segment. The existence of
niche banks and regional banks, the unfair competition of large private banks, and the
fact that private banks usually dominate the high quality segment are also mentioned.
In Argentina, large and public banks are considered price-setters; they are perceived
to set "predatory prices" to capture a larger share of the SME segment. This is
particularly harmful for small and niche banks that do not have enough margins to
compete with low rates. One important finding is that interest rates on loans do not
necessarily reflect the risk of the client: they are determined by the high level of
competition among banks. Domestic private banks consider competition in the SME
segment as a key obstacle, while foreign and public banks do not. As mentioned
above, foreign and public banks (and also the largest domestic private banks), are the
main price setters in the market. Therefore, the small and medium domestic private
banks have to compete with low rates to stay in the market and increase their market
share.
Third, another relevant obstacle mentioned is macroeconomic factors, which is
considered significant by almost half of the Argentine banks, and by only 13% of the
Chilean banks. Long-term instability, taxes, disincentives to foreign investors, and
exchange rate risk are the main aspects banks mention in terms of macroeconomic
14
obstacles. In particular, foreign banks give macroeconomic factors the greatest
importance, while public banks do not even consider them impediments. One possible
explanation for the fact that banks mention the macroeconomic factors and at the
same time still engage with SMEs could be that banks have developed coping
mechanisms to deal with long-term instability, such as using short-term loans, secured
loans, and variable rates.23 In fact, macroeconomic uncertainty (related to the history
of aggregate volatility) seems to deter the development of a long-term credit market
for SMEs, in particular in Argentina, and also appears to be responsible for the small
number of unsecured loans offered. In both countries, a high percentage of banks'
portfolios are collateralized. However, it is surprising that the other half of the
Argentine banks do not consider macroeconomic factors significant, given that the
Argentine crisis occurred only six years ago.
Fourth, regulations are regarded as significant by half of the Chilean banks,
but by only 20% of the Argentine banks. In Chile regulations are considered to be the
second largest obstacle to serving SMEs. In particular, the interest rate ceiling that
banks face in Chile is the most frequently mentioned factor. In Argentina, although
banks consider regulations to be reasonable, they also argue that many regulatory
aspects could still be improved. First, documentation requirements continue to be
costly for SMEs and could be simplified to some extent. Second, regulations impede
banks to lend to SMEs with pension debts or tax arrears. Third, more flexibility to
deal with the large informality of SMEs (especially the smallest ones) is mentioned.
Fourth, regulatory requirements are more demanding for banks than for other
financial intermediaries such as mutuales and cooperatives (which are not regulated
by the Central Bank), leading SMEs to obtain financing outside of the banking system
23The use of coping mechanisms in emerging market financial contracts is already documented in de la
Torre and Schmukler (2004).
15
and, consequently, giving rise to "regulatory arbitrage." Fifth, taxes on financial
transactions in Argentina and Chile (check tax and stamp tax, respectively) have a
negative effect on SME lending because they deter financial intermediation of SMEs.
This reduces the ability of banks to learn about some clients by looking at their
history of banking operations and it also makes cross-selling harder. Although the
stamp tax is only mentioned by Chilean banks, some Argentine provinces are also
affected by a stamp tax. In neither country do public banks consider regulations to be
a significant obstacle, while domestic private banks in both countries claim that
regulations are an impediment. However, despite these specific issues, banks consider
that regulatory requirements are either appropriate and beneficial or inconsequential.
Many banks acknowledge that in absence of these regulations they would ask SMEs
for the same information.
Fifth, lack of adequate demand is thought to be a significant obstacle by half
of the Argentine banks interviewed, while none of the Chilean banks see it as
relevant. Although some banks consider demand to be strong, they point out that
many SMEs are not creditworthy (or not as creditworthy as they could be) due to the
high levels of informality. In Argentina, anecdotal evidence from the interviewed
banks suggests that around 30% of the SMEs are served by financial entities. Most
banks believe that there are plenty of worthy enterprises among the 70% that are
underserved and that for unknown reasons do not approach banks.24 Hence, in an
attempt to increase their involvement with the segment, there is strong competition
over the high-quality SMEs that are already in the market and a significant outreach
24Another study (Fundación Capital, 2006) presents alternative reasons to explain the lack of demand
for credit from SMEs in Argentina. Among them we can find that 45.3% of SMEs do not apply
because they are using other sources or do not need financing, 13.4% consider that interest rates are too
high, 4.3% think that banks ask for too many requirements like balances, cash flows, fiscal situation of
the firm and years as a bank's client, 3.4% of SMEs do not have a collateral and 2.6% do not trust in
banks.
16
effort to attract those that are creditworthy but still outside the market. Also, banks
state that SMEs demand mostly long-term loans with low fixed-rates, while banks
primarily offer short-term variable-rate loans. Only one Argentine bank mentions that
SMEs still lack confidence in banks after the crisis and that they prefer self-financing.
Interestingly, banks declare that a large portion of approved credit lines are not fully
used.
The obstacles given the lowest importance are the legal and contractual
environment, the lending technology to SMEs, and bank-specific factors. Banks in
Argentina acknowledge that the lending mechanisms and procedures are not simple,
but they have developed know-how so that this does not represent an important
obstacle. Some issues related to the legal and contractual environment are: the
judiciary inefficiency, the weakness of contract and collateral enforcement, slow and
costly bankruptcy procedures, and the weak protection of investors and property
rights. However, banks have adapted their products to counter such obstacles by
offering short-term, secured products that can be easily converted to cash, and usually
by demanding a personal guarantee from SME owners (or their spouses). They also
avoid filing for bankruptcy, and they generally carry out debt restructuring and out-of-
court settlements. The current macroeconomic situation, characterized by excess
liquidity and low levels of default, is very favorable and mitigates these institutional
deficiencies. Bank-specific factors are mostly mentioned by public banks, which
recognize that they are more inefficient than private banks (in particular foreign
banks), and they believe that this inefficiency discourages good SMEs from
approaching them. The lack of qualified personnel is mentioned by both Argentine
and Chilean banks as an obstacle for bank involvement with SMEs. Other bank-
specific aspects mentioned are the fact that banks are learning to do business with
17
SMEs and that the geographic presence of banks is limited. As for the nature of SME
lending technology, banks point out the high fixed-costs, the difficulty to standardize
risk management and apply scoring, and the difficulty in standardizing products.
When asked about possible areas in which government action could help
enhance banks' incentives to increase SME lending, banks mostly mention the
judicial, legal, and regulatory areas (Figure 8.A). Regarding the legal and judicial
areas, Argentine banks consider that judicial processes are slow and that bankruptcy
and insolvency laws are ineffective, while Chilean banks mostly mention the
distortive effects of the stamp tax. Regarding regulations, Argentine banks highlight
the need to improve the definition of guarantees and consider that the frequency of
information requests should be lower in some cases, while Chilean banks mention that
the interest rate ceiling should be removed and would like to be able to share
guarantees. In general, banks both in Argentina and Chile wish to increase guarantees
or subsidies, and both are fairly comfortable with the institutional environment. Some
of the institutional improvements that Argentine banks consider would be beneficial
are related to law enforcement and collateral execution processes, which banks point
out, are hindering long-term financing. According to Argentine banks, the
government should continue promoting the development of reciprocal guarantee
societies (SGRs). On the other hand, Chilean banks demand for an expedited payment
of FOGAPE guarantees. (See Table 3 for a description of this program.) More
government work is needed to enhance credit bureaus, but the majority of the banks
consider that the existence of public credit bureaus already plays a crucial role in
facilitating SME lending (Figure 8.B). In particular, Argentine banks state that the
quality of the information should be enhanced and they would also like more
information on companies, such as total amount of credit lines and guarantees in the
18
banking system. Chilean banks would like financial statements to be available in
order to assess companies' income-generating capacity.
6. Competition and Government Programs in the SME Segment
This section covers two remaining aspects that shape bank involvement with
SMEs. First we analyze how competitive the market is. Second, we discuss to what
extent banks' interest in serving SMEs is based on incentives generated through
government programs.
According to most banks, the SME market is promising. However, there is no
agreement on the size of the market, even within the same country. The market is
large according to 70% of the banks in Argentina and 50% of the banks in Chile,
while it is considered to be small by around 30% of the banks in both countries
(Figure 9). This discrepancy is likely due to the fact that the SME universe is not
clearly identified in either country. In Argentina, as an approach to resolving this
issue, a program by SEPyME called "MAPA PyME," is being launched. This SMEs
Sub-Secretary program tries to describe the SMEs' universe based on an assessment
of all formal SMEs in the country.
Banks still have a fair amount of outreach to do despite the strong demand for
bank services observed in the SME segment, according to 81% of the banks (Figure
10). Although SME demand does not make use of all the available credit offered by
the banking system, banks point out that demand is indeed growing strongly.
However, as mentioned above, SMEs that seek credit are not always creditworthy.
Many banks believe that there are "high-quality" SMEs that could benefit from
accessing bank financing but that do not approach banks for unknown reasons.
Therefore, banks feel the need to reach out to these SMEs. High competition over the
19
best SMEs that are already in the market also explains the need to make efforts to
attract new SME clients. Banks rely on the pro-active role of relationship managers,
and some banks even carry out special campaigns to attract SMEs. One bank states
that since SMEs do not react to advertisements as promptly as consumers, efforts to
attract them are greater.
The market is highly competitive, but unsaturated. High competition in the
SME segment could also explain the need to reach out to SMEs. As indicated in
Figure 11, all the banks interviewed believe that the SME segment is competitive.
However, there is no consensus on the degree of saturation of the market. 80% of the
banks believe there is still room for new competitors, while the rest believes the SME
market is saturated.
The structure of the SME loan market differs between Argentina and Chile,
and there is no full agreement within the countries. Among Argentine banks, 62% of
the banks perceive that the market is atomized, 23% believe a small number of banks
dominate the market, and only 15% deem it to be segmented. In Chile, the answers
are not as dispersed: 75% of the Chilean banks consider that the SME loan market is
dominated by a small number of banks and 13% see it as a segmented market. To
summarize, in Argentina most of the banks perceive the market to be atomized, while
in Chile the prevailing belief is that a small number of banks dominate the market
(Figure 12.A).
The main players in the SME market are large private banks, according to the
majority of the banks in Argentina and Chile. They are followed in importance by
public banks and niche banks. Other financial intermediaries and small banks also
play a relevant role in the SME loan market, although a minority of the banks
interviewed consider these to be main players (Figure 12.B).
20
There have been significant changes over time in SME lending in terms of
competition, consolidation, and entry, according to 70% of the banks. In both
countries many banks have participated in the segment for years, but others are
entering with very aggressive policies. Another significant finding is that almost 62%
of the banks in both countries believe that banks lend to SMEs after seeing other
banks do so. Almost 60% of the banks believe that there is a first mover's advantage:
client's loyalty, brand identification, and know-how of the market are the most
frequently mentioned advantages. Although more than half of the banks answer that
there is a first movers' advantage, the difference in perceptions is significant across
bank types. Most private domestic banks consider that a first movers' advantage does
exist while public banks deny it. Most foreign banks answer affirmatively in
Argentina. In Chile the process of capturing SME clients appears to be more advanced
than in Argentina: while in Argentina SMEs usually have five or six banks serving
them in different aspects of their business, the Chilean market has evolved to the point
that an SME is only served by one or two banks, which offer an ample variety of
products and services to fulfill the needs of SMEs. In Chile the importance of the
relationship manager appears to be crucial for SMEs when choosing banks.
Despite all this competition, the Argentine and Chilean governments have
implemented several programs to promote the involvement of banks in the SME
segment. But these incentives notwithstanding, only half of the banks interviewed
claim that they use these programs (still, 80% believes their overall effect is positive).
Furthermore, these programs are not an important determinant of bank involvement
with the segment. Indeed, banks do not base their relation with SMEs on these
programs. Banks might use them, but they are not the key driver of their involvement.
Although all types of banks view these programs favorably, in terms of additionality
21
generated there seems to be some disagreement.
In Argentina, all banks are familiar with government programs, but none
consider them essential. The most frequently mentioned programs are the interest rate
subsidies offered by the SME Secretary (SEPyME), and the Argentine National
Guarantee System (that includes Reciprocal Guarantee Societies, SGRs). FONTAR
(Argentine Technological Fund), and the credit lines offered by the Inter-American
Development Bank are also mentioned but banks do not believe they have a
significant impact. (See Table 3 for a detailed, but brief description of these
programs.) Most Argentine banks believe that the additionality generated by these
programs is very low. Although 90% of the banks use the interest rate subsidy, they
claim that they do not make use of it to attract new clients, but rather to lower the rate
or increase credit to existing clients. Only a few private domestic and public banks
state that the SEPyME interest rate subsidy generates additionality. The SGRs are
employed by almost 20% of the banks interviewed and they are mostly used to
increase the credit line to existing clients. Only private domestic banks claim that
these guarantee societies allow them to attract new clients.
Most Chilean banks make use of government programs and believe these
programs do generate additionality. In Chile the programs FECU-PyME (Uniform
Codified Reporting Scheme for SMEs), CORFO (Corporation for Production
Promotion), and FOGAPE (Small Enterprise Guarantee Fund) are considered most
relevant by banks. See Table 3 for a detailed description of these programs. Most
Chilean banks indicate that the programs FOGAPE and CORFO do generate
additionality, mainly by attracting new clients. Foreign banks seem to be among the
ones that benefit the most from these programs. FECU-PyME is mostly used by
private banks, but they do not see it as a program that generates additionality, while
22
Chile Compite is only used by one private domestic bank interviewed.
7. Conclusions
Using evidence from banks in Argentina and Chile, this paper explored the
drivers and obstacles that shape bank involvement with SMEs and, in particular,
investigated to what degree the competitive and institutional environments appear to
play an important role. We find that SMEs have become a strategic sector for banks.
This signals a gap in perceptions since it contradicts the view that banks are not
interested in serving SMEs. Furthermore, bank interest in SMEs is not based on
government programs. Instead, this change seems to be explained in part by
decreasing profits in other segments due to the emerging competition, which in turn
encourages banks to look for new markets as the growth potential based on the
consumer and corporate sectors declines. Banks focus on SMEs because they estimate
that the segment's elevated profits will more than compensate for the higher implied
costs and risks. Furthermore, banks might be attracted by the increasing participation
of SMEs in the productive chains of the economy. This occurs in a context of
apparent significant changes in industrial organization, in which large corporations
outsource processes and actively support their SME clients and suppliers to foster
their own growth.
Banks consider that the SME lending market is large, unsaturated, and
prospects are optimistic in both countries. The importance of the SME segment has
grown to the point that most banks have created separate units to serve it and compete
intensively among themselves to try to capture new SMEs as clients. In other words,
the engagement between banks and SMEs has become integral since banks offer
SMEs a great variety of services and lending products. This questions the traditional
23
focus of the literature on banks connecting to SMEs through relationship lending (as
argued in de la Torre, Martinez Pería, and Schmukler, 2008). In the case of
international banks present in both countries, the strategies to engage SMEs across
countries are remarkably similar. Although the SME universe is not clearly identified
in Argentina or Chile, banks are aware of the large number of high-quality, untapped
SMEs that could benefit from accessing bank financing and, consequently, banks are
actively reaching out to them.
To deal with the SME segment, banks have developed coping mechanisms
that help them overcome some of the obstacles in SME financing. As a consequence,
the particular institutional environment in each country is not considered by most
banks a binding constraint for financing SMEs. Namely, the potential benefits of
serving SMEs more than compensate for the possible institutional deficiencies, given
that banks can reduce the risk of dealing with the segment. Among other things, banks
have developed the mechanisms to deal with informality, regulatory requirements,
documentation and paperwork burden, and the costly constitution of guarantees.
Needless to say, this imposes an extra cost to the system. For example, banks have
limited the range of products they offer to SMEs to cope with macroeconomic and
contractual risk.25 They offer mostly short-term, secured products, making an intense
use of immovable guarantees and always demanding the owners' guarantee.
Furthermore, perhaps another consequence of the institutional shortcomings is that
banks' engagement with SMEs is based primarily on services rather than loans,
reducing banks' exposure to SME risk.26 The institutional environment is likely to be
more relevant for other types of financing, like long-term loans in fixed rates in
25The ability to cope with risk is observed in emerging economies in general; see de la Torre and
Schmukler (2004).
26See de la Torre, Martinez Pería, and Schmukler (2008).
24
domestic currency and for countries with weaker institutional frameworks. For the
types of cases analyzed in this paper, policy action might focus on complementing
what banks need to expand their participation and provide the type of financing that
might still be lacking.
A lingering question is how much of the above-mentioned developments in
SME financing constitute a trend, and how much they are due to the macroeconomic
stability and low interest rates observed in Argentina and Chile at the time of the
survey. There is evidence of flight to quality when rates rise, and SMEs could be
more vulnerable to GDP volatility than large corporates. Hence, part of the move
toward SME lending could be explained by the overall stability, high liquidity, and
low rates, which have contributed to the saturation of the market for consumer and
corporate loans. Nevertheless, the evidence presented in this study seems to point to a
new, profound trend developing: Argentina and Chile appear to be facing an
embryonic "bancarization" of the SME segment. Banks have discovered a key,
untapped segment and are making substantial investments to develop the relation with
SMEs and compete for them. Moreover, banks are developing the internal structures
and mechanisms to work with SMEs, adapting their business and risk models to
reduce the costs and risks of the segment. As part of this process, banks still need to
obtain better measures of their exposure to the segment in terms of income, costs, or
risk. Thus, there seems to be a learning process through which banks are developing
the structure to deal with SMEs. Still, some changes might occur as the
macroeconomic cycle turns, since the favorable macroeconomic conjuncture mitigates
the institutional deficiencies as the banking system has witnessed historically high
levels of liquidity and low levels of non-performing loans.
25
Despite the aforementioned findings, there is still substantial room for
improvement in SME financing that requires action on behalf of banks, SMEs, and
policymakers. SMEs would probably benefit from an expanded offer of long-term
credit and would likely gain more access to finance if they reduced their levels of
informality. Authorities could facilitate this process of formalizing the SMEs'
economic activity. Governments could also help by improving the overall institutional
environment, working with the private sector in the specific rules and regulations that
might be hindering the development of long-term financing. But the rules and
regulations for markets to be completed are very specific to each country, as evident
from the bank responses described in this paper. For example, banks in Chile mention
that allowing guarantees to be shared could unlock credit.
Access to information seems crucial to make progress in SME financing. In
particular, improving information availability is a key aspect that could enhance
financing to SMEs. This involves the supply side of financing (banks), the demand
side (SMEs), and the government, which regulates and shapes the institutional
environment. For example, the lack of adequate information regarding the SME
universe is an important problem to be tackled and governments could help
substantially with it. It would be especially useful to identify the universe of SMEs
and to quantify the share of SMEs that actually has access to finance. Moreover, given
the banks' interest in serving SMEs, having more information about the actual needs
of SMEs (from the financial sector) would be important to help guide future reform
efforts. On the supply/bank side, additional information could also help, such as the
percentage of SMEs that are rejected by banks when applying for a loan and the
contribution of the segment to banks' income, costs, and risks. Governments could
also help reduce the existing information gap by increasing the flow of information
26
regarding the evolution of the SME market, for example, by making SMEs' balance
sheets public and easily available. Of course, improving information availability
would be easier to accomplish for medium-sized enterprises than for small ones,
given the smaller number of medium-sized companies and their relative visibility,
sophistication, and capacity to act as large corporations.
Finally, the analysis from this paper leads us to two final conclusions. First, to
the extent that there is a trade off in government actions, governments could increase
their attention to reducing the cost of lending to SMEs (so banks lend more), rather
than increasing the government programs that foster the quantity of lending itself. For
example, governments could help reduce the informational gaps and change the
specific rules and regulations that inhibit banks to have a deeper and more long-term
involvement with SMEs. Second, the fact that banks learn to operate in the different
institutional environments does not mean that there could not be several
improvements in this area (which are particular to each country and circumstance)
that would foster SME lending even more.
27
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Beck, T., Demirgüç-Kunt, A., and Maksimovic, V., 2005. Financial and Legal
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Heritage Foundation, 2008. Index of Economic Freedom. Washington, DC.
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30
Table 1
Definition of SMEs
This table shows the criteria banks use to define SEs and MEs. All banks indicate that they use the average sales criteria (as opposed to total
assets, total employees, or other possible definitions). The values in the top panel are expressed in US dollars and the ranges are calculated as
the average lower bound and average upper bound of average annual sales that define SEs and MEs. The bottom panel presents the same
information with a greater level of detail, showing the maximum and minimum values of the lower bound and upper bound of the average
range of sales presented in the top panel. Banks are asked: "Specifically provide your bank's definition criteria for SEs (MEs)."
Average range of sales to define SEs Average range of sales to define MEs
US Dollars US Dollars
From To From To
Argentina 288,889 4,647,704 4,647,704 30,000,000
Chile 90,000 1,595,143 1,595,143 23,800,000
Lower bound of sales to define SEs Upper bound of sales to define SEs
US Dollars US Dollars
Minimum Maximum St. Deviation Minimum Maximum Std. Deviation
Argentina 0 1,300,000 503,598 833,333 12,000,000 4,165,762
Chile 0 180,000 53,229 866,000 2,300,000 609,452
Lower bound of sales to define MEs Upper bound of sales to define MEs
US Dollars US Dollars
Minimum Maximum St. Deviation Minimum Maximum Std. Deviation
Argentina 833,333 12,000,000 4,165,762 10,000,000 75,000,000 22,200,000
Chile 866,000 2,300,000 582,116 2,000,000 50,000,000 22,900,000
Table 2
Obstacles to bank involvement with SMEs
Banks are asked to list up to three important factors that are obstacles to their involvement with SMEs. This table lists the most frequently
mentioned factors and repeats the information illustrated in Figure 7 by presenting the percentage of banks that consider each type of obstacle
significant, very significant, or extremely significant. The percentage of banks that consider these factors marginally significant or not
significant is not presented in the table. For Table 2 banks are asked to "Indicate to what degree the following factors are important obstacles
to your exposure to SMEs. Rate them and specify up to the three most important aspects within these categories."
Percentage of banks that consider the
Type of obstacle Frequently mentioned factors
obstacle at least significant
Argentina Chile
SME-specific factors 46% 50% Scoring is inadequate
Informality
Lack of quality information
Cannot evaluate SMEs based on behavior
Costs to improve information are high
Family management
Lack of adequate guarantees
Competition 69% 13% Difficult to continue growing
Narrow margins
Private banks in high quality segments
Public banks distort the market
Unfair competitors (strong private and public banks)
Macroeconomic 46% 13% Long term instability
Ceiling prices
Exchange rate or interest rate risk
Ban on exports
Regulations 23% 50% Too much documentation required
Ceiling rates
Inflexibility
Financial transaction taxes / Stamp tax
Obstacles in foreign exchange transactions
Regulation forces banks to act as tax authorities
Legal and contractual 31% 38% Judicial inefficiency
environment Judicial insecurity / dependent on politics
Bankruptcy process very costly
Lack of contract enforcement
Nature of SME lending 23% 38% Costly
technology Difficult to standardize risk management (scoring and rating)
Need to adapt commercial model
Difficult to standardize products and procedures
High entry costs
Lack of adequate 46% 0% Supply exceeds demand
demand SMEs only demand low fixed rates in pesos
SMEs prefer self-financing
SMEs think banks are tough
Bank-specific factors 23% 13% Some banks are new to the segment
Inefficiency
Lack of technology and qualified personnel
Lack of expert analyst in commercial and risk sectors
Limited geographic presence
Table 3
Government programs
Argentina
SEPyME - Interest rate subsidy
This is a program of the SME Secretary that links small entrepreneurs with financial institutions, subsidizing up to eight percentage points on loans to SMEs. The subsidies are granted
through public bids to the banks that offer the lowest interest rates. Since this program was first applied in August 2003, more than 200,000 operations have been supported by this
program and funds have totaled AR$1,300,000 for the financing of working capital and investment projects
National Guarantee System
This system is composed of Reciprocal Guarantee Societies (Sociedades de Garantía Recíproca, SGR) and a provincial public guarantee fund called Guarantee Fund of the Buenos Aires
Province (FOGABA). SGRs are private corporations whose objective is to increase SME access to financing by providing guarantees for their loans through a fund that fosters risk taking.
This is a strategic association since SGRs are formed by participating shareholders (SMEs), and protecting shareholders (public or private, domestic or foreign entities). Protecting
shareholders make the main contributions to the fund while participating shareholders make small contributions and are the beneficiaries of the guarantees backed by the fund. One of the
advantages of SGRs is that contributions to the fund are exempted from income and value added tax as long as some conditions are met. In 2005 there were 20 SGRs with a US$112.4
million fund guaranteeing US$97.7 million in credit. FOGABA usually limits coverage to 75% of the loan value, has a fund of US$8.3 million and a stock of guarantees of US$12
million.
FONTAR (Fondo Tecnológico Argentino / Argentine Technological Fund)
FONTAR finances public and private projects that promote innovation and technological modernization through a wide variety of financial instruments. The funds are provided by
domestic or foreign sources, from both public and private entities, who can demand these funds to be applied to general or specific uses in the promotion of technological innovation.
FONTAR also provides technical assistance, personnel training programs, and a thorough monitoring of these projects.
Chile
FOGAPE (Fondo de Garantía para Pequeños Empresarios / Small Enterprise Guarantee Fund)
FOGAPE is a guarantee system that allows SMEs to overcome their lack of guarantees or insufficient guarantees to access lending from the financial system. It is a public fund managed
by Banco Estado that provides partial credit guarantees to working capital loans or investment loans provided by commercial banks to SMEs. Its design includes several features to reduce
moral hazard problems: partial credit guarantees that force banks to share part of the risk, a bidding process that determines how risks are shared among FOGAPE and financial
intermediaries, the exclusion of banks with high default rates on guaranteed loans from future bidding processes, and limits on the guarantees that each bank can obtain from FOGAPE.
FECU-PyME (Ficha Unica Codificada Uniforme para PyMEs / Uniform Codificated Reporting Scheme for SMEs)
FECU-PyME is a joint private and public initiative undertaken by the Superintendence of Banks and Financial Institutions (SBIF) and the Chilean Association of Banks (ABIF) aimed at
simplifying and standardizing the available SME financial information. The implementation of a unified reporting scheme for SMEs seeks to solve the lack of quality information,
increase transparency, and improve the relation between SMEs and the financial system.
CORFO (Corporación de Fomento a la Producción / Corporation of Production Promotion )
CORFO is a public entity that offers a wide variety of programs to promote the development of technological innovation, investment projects, export-related activities, education
scholarships, and regional integration. Its financial services include loans, guarantees, leasing, and factoring.
Chile Compite
Chile Compite is a government program that was launched in June 2006 and is aimed at promoting technological innovation and SME access to financing through a comprehensive
package of 15 plans. This program includes regulatory simplifications, tax reductions for software imports, technical assistance, exemptions to the stamp tax for SMEs, subsidies of up to
35% for research and development programs, and the creation of a National Secretary for Innovation, among others.
Figure 1
Bank involvement with SMEs
This figure shows that almost all the banks in the sample have SMEs among their clients and that the relation established with them is
integral. Banks are asked: "Does the bank currently have SMEs among its clients?"
Does the bank have SMEs among its clients?
100% 92% 100%
90% Argentina Chile
80%
70%
banks 60%
of
gea 50%
40%
Percent 30%
20% 8% 0%
10%
0%
Yes No
Figure 2
Bank exposure to SMEs (I)
The information shown in this figure is derived from the data we collected from banks. The ratios presented in Figure 2 are calculated as the sum of loans offered to
SMEs according to the data provided by the banks over the sum of loans offered to the private sector according to these same banks. Therefore, Figure 2 presents
financing to SMEs as a share of total financing to the private sector for 2005 and 2006, for Chile and Argentina separately. In parentheses we present the share of total
private sector loans that correspond to the banks that answered.
Financing to SMEs as a share of financing to the private sector
40% 36% 37%
35% Argentina Chile
s
anlor 30%
secto 25%
ateivrp 20%
ervos 14% 13%
15%
anlo
E 10%
MS (49%) (72%) (64%) (80%)
5%
0%
2005 2006
Figure 3
Bank exposure to SMEs (II)
The information shown in this figure is derived from the data we collected from banks. The source of the panels is the same but the information is displayed differently
in each case. Figure 3.A shows the average financing to SMEs as a percentage of total bank financing to the private sector in the most involved, medium involved, and
least involved banks of the aggregated sample of Argentina and Chile for 2006. The most involved banks are the top third of banks with the highest share of SME loans
as a percentage of total bank loans to the private sector. The least involved banks are the bottom third of banks with the lowest share of SME loans as a percentage of
total bank loans to the private sector. The medium involved banks are the ones that do not fall in either category. Figure 3.B illustrates financing to SMEs by type of
bank for 2006. The banks that answered the information presented in both panels represent 64% of total private sector loans in Argentina and 80% in Chile.
A. Financing to SMEs as a share of financing to the private sector
By level of involvement
70% 62%
ns
oal 60%
ortceset 50%
va
prir 40% 28%
ove
ns 30%
oal
E
MS 20% 8%
10%
0%
Most involved Medium involved Least involved
(Top third) (Bottom third)
B. Financing to SMEs as a share of financing to the private sector
By type of bank
70%
60% 56%
ns Argentina Chile
oal
ortceset 50%
40%
va 31%
prir 30% 27%
ove
ns
oal 20% 16% 12%
E
MS 10%
0%
Private domestic banks Foreign banks Public banks
Figure 4
Products offered to SMEs (I)
This figure shows the range of products that banks offer to SMEs and the percentage of banks that mention each product. "Other" includes insurance products, mortgages,
credit cards, advances, and promissory notes. Banks are asked: "List the main lending products you offer to SMEs."
Main products offered to SMEs
100% 88% 88% Argentina Chile 88%
90%
80% 69%
nks 70% 63% 62%
ba
of 60% 54% 54%
46% 50%
geanterceP 50% 38%
40%
30%
20% 15%
10% 0% 0%
0%
Short-term Leasing Investment Pre-trade Document and Factoring Other
loans and loans financing check
overdrafts discounting
Figure 5
Products offered to SMEs (II)
The source of this figure is the data collected from banks. The banks that answered the information displayed in Figure 5.A represent around 40% of
the private sector loans in each country and the banks that answered the information displayed in Figure 5.B represent between 15% and 20% of the
private sector loans in each country. Figure 5.B displays the weighted average of the terms of the main lending products to SMEs, weighted according
to the amount each bank lends of each product.
A. Share of main products in total lending to SMEs
sE 70% 63%
MS 60% Argentina Chile
to
50% 38%
loans
40% 32%
total
in
30%
oducts 17%
pr 20%
ofearhS 8% 7% 7% 6%
10%
0%
Working capital loans Investment loans Credit letters Leasing
B. Average term of main lending products to SMEs
Weighted average according to bank lending of each product
4,000 3,704
3,500 Argentina Chile
days 3,000
of
erbmuN2,500 Working capital loans
2,000
1,500 1,041 1,171 1,399 1,116
1,000 745
372
198
500 139 25 99 28 142 98 40 176 180
0 45 88
0
Working Credit Over- Credit Other Investment Credit Leasing Factoring Other
capital cards drafts lines loans letters
loans
Figure 6
Drivers of bank involvement with SMEs
Banks are asked to indicate to what degree their involvement with SMEs is driven by the factors presented in Figure 6. The options available to qualify
the importance of these factors vary from not significant to extremely significant/crucial. This figure shows the percentage of banks that consider these
factors significant, very significant, or extremely significant/crucial drivers. The percentage of banks that consider these factors marginally significant
or not significant is not presented. It should be noted that "Social objective" and "Strategic sector" are not factors given by the questionnaire, but they
are mentioned as a relevant factor by some banks. "Other segments" refers to the corporate and/or retail segments. For Figure 6 banks are asked "To
what degree is your involvement with SMEs driven by the following?: i) Perceived profitability in the SME segment, ii) Intense competition for large
corporations, iii) Intense competition for retail customers, iv) Excessive exposure to large corporations, v) Excessive exposure to retail customer
service, vi) Possibility to seek out SMEs through existing relations with large clients (e.g. reverse factoring), and vii) Other (specify)."
Main drivers
100% 92%
90% Argentina Chile
80% 69% 75%
70% 63%
banks
of 60% 54% 50%
50%
centagereP 40% 31%
25% 25%
30% 25%
20% 8% 15%
10%
0%
Perceived Relations with Strategic Competition in Exposure in Social objective
profitability large clients sector other segments other segments
Figure 7
Obstacles to bank involvement with SMEs
Banks are asked to indicate to what degree the factors observed in the figure are important obstacles to their exposure to SMEs. This figure
shows the percentage of banks that consider each factor significant, very significant, or extremely significant/crucial. The percentage of
banks that consider these factors marginally significant or not significant is not presented in the figure. For Figure 7 banks are asked to
"Indicate to what degree the following factors are important obstacles to their exposure to SMEs. Rate them and specify up to the three
most important aspects within these categories."
Main obstacles
100%
90% Argentina Chile
80% 69%
70%
50% 50%
banks 60%
of 46% 46% 46%
38% 38%
gea 50%
40% 31%
Percent 30% 23% 23% 23%
20% 13% 13% 13%
10% 0%
0%
SME- Competition Macro- Regulations Legal and Lending Lack of Bank-
specific in SME economic contractual technology adequate specific
factors segment factors environment to SMEs demand factors
Figure 8
Role of the government
Figure 8.A displays the percentage of banks that answer affirmatively that government actions could increase the appeal of SME lending
in each area and Figure 8.B shows, in particular, the perceived importance of credit bureaus for SME lending. For Figure 8.A banks are
asked: "Do you think the government could increase the appeal of SME lending through actions in the following areas?" and for Figure
8.B: "Does the existence of a public credit bureau facilitate SME lending?"
A. Areas in which government action could promote SME lending
70%
60% 54% 50% Argentina Chile
46%
50% 38% 38%
38%
banks 40%
of 31%
25%
30% 25% 23% 23%
Percentage 20% 13% 15% 13%
10%
0%
Judicial Legal Regulatory Insitutional Guarantees Credit bureaus Subsidies
B. Does the existence of a public credit bureau facilitate SME lending?
92%
100%
Argentina Chile
90%
75%
80%
70%
banks 60%
of
gea 50%
40%
Percent 30%
8% 13%
20%
10%
0%
Yes No
Figure 9
Market environment (I)
This figure shows the percentage of banks that answer each question regarding their view on the size and prospects for the SME market in
general. For Figure 9 banks are asked: "What is your view on the size and prospects for the SME market in general, not just for your
bank?"
Size and prospects of the SME lending market
Big market / Good prospects
50%
69%
Small market / Good prospects
25%
31% Argentina Chile
0% Big market / Bleak prospects
0% Small market / Bleak prospects
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of banks
Figure 10
Market environment (II)
Banks are asked about their perceptions of the demand of the SME lending market and the degree of reaching out they have to do. The
figure shows the percentage of banks that answer each question affirmatively. For Figure 10 banks are asked: "How much reaching out
does the bank have to do?: i) The bank has a strong demand so no reaching out is required to SMEs, ii) Despite strong demand for our
SME products we still do a fair amount of reaching out, and iii) Demand is weak so we have to actively seek clients by reaching out to
them." The first option is not represented in the chart because no banks chose that answer.
SME lending demand
Demand is weak / Actively seeking clients
Argentina Chile
25%
8%
Demand is strong / Fair amount of reaching out
63%
92%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of banks
Figure 11
Market environment (III)
Banks are asked to express their view on how competitive the market for SME lending is. The figure shows the percentage of banks that
indicate each option given. The percentages for the aggregated sample of Argentina and Chile are shown because the answers are very
similar for both countries. For Figure 11 banks are asked: "How competitive is the market for SME lending?"
How competitive is the market for SME lending?
Competitive / Not saturated
76%
Competitive / Saturated
19%
0% Not competitive / Low entry costs
0% Not competitive / High entry costs
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of banks
Figure 12
Market structure
This figure analyzes the SME lending market structure and the main players in the market as perceived by banks. For Figure 12.A banks
are asked: "What is the market structure of the SME loan market?" For Figure 12.B: "Who are the main players in SME financing?"
A. What is the market structure of the SME loan market?
75%
80% Argentina Chile
70% 62%
60%
banks 50%
of
gea 40%
30% 23%
Percent 15%
20% 13%
10% 0%
0%
Small number of banks Market very segmented Market atomized
dominate the market
B. Who are the main players in SME financing?
100% 100% 92%
90% 88% Argentina Chile
80%
70% 62%
banks 60% 54%
of 50%
gea 50% 38%
40%
Percent 30% 23%
20% 13%
10% 0%
0%
Large banks Public banks
public banks Niche banks Other financial Small banks
intermediaries
Appendix Figure 1
Obstacles to bank involvement with SMEs (I)
For Appendix Figure 1, Appendix Figure 2, and Appendix Figure 3 banks are asked: "Indicate to what degree the following factors are important obstacles to your exposure
to SMEs. Rate under each heading and specify up to the three most important aspects within these categories." The categories are: macroeconomic factors, regulations,
legal and contractual environment, bank-specific factors, SME-specific factors, nature of the lending technology to SMEs, competition in the SME segment, and lack of
adequate demand. In Appendix Figure 1, Appendix Figure 2, and Appendix Figure 3 we present the most-frequently mentioned aspects for each category.
A. Macroeconomic aspects mentioned as obstacles to bank involvement with SMEs
40%
35% 31% Argentina Chile
30% 23%
banks 25%
of
20% 13%
13% 13% 8% 8%
15%
Percentage 10%
0%
5% 0% 0%
0%
Long term instability Taxes Interest rate risk Disincentives to foreign Exchange rate risk
investors
B. Regulatory aspects mentioned as obstacles to bank involvement with SMEs
70% 63%
60% 46% Argentina Chile
50%
nks
ba
of 40%
geatnecr 30% 23%
Pe 20% 8% 13%
10% 0% 0% 0%
0%
Maximum interest rate Too much documentation Forces to act as tax Asymmetric regulations for
required authorities diferent providers
C. Aspects from the legal and contractual environment mentioned as obstacles to bank involvement with SMEs
70%
Argentina Chile
60%
46%
50%
banks
of 40%
25% 25%
30% 23%
Percentage 15%
20%
8%
10% 0% 0%
0%
Judicial inefficiency Bankrupcy regulations Slow collateral execution Lack of contract enforcement
Appendix Figure 2
Obstacles to bank involvement with SMEs (II)
For Appendix Figure 1, Appendix Figure 2, and Appendix Figure 3 we ask banks: "Indicate to what degree the following factors are important obstacles to your exposure
to SMEs. Rate under each heading and specify up to the three most important aspects within these categories." The categories are: macroeconomic factors, regulations,
legal and contractual environment, bank-specific factors, SME-specific factors, nature of the lending technology to SMEs, competition in the SME segment, and lack of
adequate demand. In Appendix Figure 1, Appendix Figure 2, and Appendix Figure 3 we present the most-frequently mentioned aspects for each category.
A. Bank-specific aspects mentioned as obstacles to bank involvement with SMEs
50%
Argentina Chile
45%
38%
40%
35%
banks 30%
of
gea 25%
15% 15%
cent 20%
13%
Per 15%
8%
10%
0%
5%
0%
Bank learning to do business with SMEs Lack of qualified personnel Limited geographic presence
B. SME-specific aspects mentioned as obstacles to bank involvement with SMEs
100%
100%
90% Argentina Chile
75%
80%
70%
nks
ba 60%
of
geatnerceP 50%
40%
30% 23% 23%
20% 13% 13%
10% 0% 0%
0%
Informality Lack of quality information Lack of adequate guarantees Low quality balance sheets
C. Aspects of the lending technology to SMEs mentioned as obstacles to bank involvement with SMEs
50%
45% Argentina Chile
38%
40%
nks 35%
ba 25%
30%
of
geanterceP 25%
15% 15%
20%
13%
15% 8%
10%
5%
0%
Difficulty in standarizing risk Difficulty in standarizing products High fixed costs
management
Appendix Figure 3
Obstacles to bank involvement with SMEs (III)
For Appendix Figure 1, Appendix Figure 2, and Appendix Figure 3 banks are asked: "Indicate to what degree the following factors are important obstacles to your exposure to
SMEs. Rate under each heading and specify up to the three most important aspects within these categories." The categories are: macroeconomic factors, regulations, legal and
contractual environment, bank-specific factors, SME-specific factors, nature of the lending technology to SMEs, competition in the SME segment, and lack of adequate
demand. In Appendix Figure 1, Appendix Figure 2, and Appendix Figure 3 we present the most-frequently mentioned aspects for each category.
A. Aspects related to the competition mentioned as obstacles to bank involvement with SMEs
69%
80%
Argentina Chile
70%
54%
60%
banks 50% 38% 38%
of
40%
25%
centage 30%
Per 13%
20%
10%
0%
Unfair competition High competition Narrow margins
B. Aspects related to demand mentioned as obstacles to bank involvement with SMEs
40%
35% Argentina Chile
30%
nks
ba 23%
of 25%
ge 20%
ntaecreP 15% 13%
10% 8% 8% 8%
5% 0% 0% 0% 0% 0%
0%
Efforts must be made to Lack of demand in some SMEs seek fixed rates SMEs prefer self- SMEs seek long-term
attract adequate SMEs sub-segments in pesos financing loans